LANDOWNER

4th Quarter 2018

Industry News Industry Overview

 ND Paper to invest $111 million Forestland Operations in Rumford mill; 50 more jobs The momentum that was built up in early autumn has, for the most part, continued through th (Oct. 8 ) the fourth quarter. While the weather in October and the first part of November was relatively ND Paper plans to invest $300 dry, significant wet weather covered the region in the later part of November. Nearly two million in its mills in Maine and Wisconsin over the next weeks of rain brought a swift end to what had been a largely uninterrupted flow of timber, and two years. In Rumford, Maine, a good part of the northeast shut down both road systems and harvest operations to protect the $111 million investment will sustain the jobs of the the forest. Timber hauling on one major private road system was halted for over a week, which 650 employees and add 50 will likely have at least some cascading effect on early winter deliveries to Canadian sawmills. employees. The investment will finance two significant projects: The installation of a shoe press on one paper machine, which increases the machine's production capacity by approximately 20%, and the construction of a greenfield recycled pulp facility. — Lewiston Sun Journal

 Shuttered Old Town paper mill to be sold to Chinese firm (Oct. 10th) The Old Town Mill is being sold again, this time to ND Paper LLC, with a promise of bringing "well over 100 high- paying jobs" to the area. ND Paper LLC has a definitive asset purchase agreement to buy the Old Town property from OTM Holdings LLC. To cut costs, ND Paper will move the production mix from hardwood kraft to softwood kraft pulp, because Tall frosty pine trees in central Maine already beginning to bear the brunt of winter. the latter is abundant locally. It also will eliminate the bleaching operations and focus on Not only does the supply chain ordinarily take time to get caught up when weather causes unbleached softwood pulp. interruptions, but it is becoming more apparent each year that the trucking constraints that — Bangor Daily News have been plaguing more remote regions for some time are becoming a significant impediment to getting wood to market. The confluence of many economic forces — low unemployment, market contractions, lack of skilled and trained workforce, the demanding nature of the job, escalating regulations, and low pay — have left many parts of the northeast without the surge capacity the forest products industry has become accustomed to. In 2018, more than any other year, the shortage of available trucks hindered the movement of forest products, and we found ourselves in competition for the services of good drivers. This challenge already has caused us to revisit trucking rates in some areas.

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 1 of 6 NUMBER 2 DIESEL FUEL PRICES - NEW ENGLAND 3 YEAR HISTORICAL MONTHLY AVERAGES $3.50 LANDOWNER $3.28 3-Year High: $3.37 $3.25 4th Quarter 2018

$3.00  Maine's paper industry 'positioned to have a revitalization’ $2.75 (Oct. 14th) For much of this decade, the $2.50 paper industry's most notable Average Retail Price($/gal) Retail Average product has been bad news: entire mills closing, others $2.25 idled for weeks or months, 3-Year Low: $2.15 bankruptcies, machines shutting Source: U.S. Dept. of Energy $2.00 down and workers laid off. Now, Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Jan 2019 after two decades of cascading drops in papermaking jobs, the basement seems to have been reached. And that, ironically, Thankfully, despite the weather and comforting to have the timber already at the gives hope to those watching the trucking issues, we were able to get a jump same location where it will be processed. future of the industry. — Press Herald on our winter deliveries early in the quarter. However, the second option is often more We were able to finish 2018 either on or preferable for loggers and truckers, because  Homebuilder confidence slightly ahead of our plans. At this point, the wood yards are located along shorter and plummets to the lowest level in flow of wood is back up to pace and we are more convenient routes. With landowners, more than two years as 'demand ahead of where we usually are this time of loggers, and mills all competing for trucking stalls' (Nov. 19th) year. Wintertime is of course the season in capacity, we have seen mills forced to shift Rising mortgage rates and which we move the most amount of timber, their sourcing strategy to rely more on continued home price growth and all the pieces are in place for a good remote wood yard infrastructure so they can are hurting affordability and start to 2019. The only question is whether get the wood they need. fast becoming a toxic cocktail for the nation's homebuilders. the cold weather will set in to support our Sentiment among homebuilders logging operations — so, from here on out, it's dropped 8 points in November P&C DEMAND INDICATORS to 60 in the National Association in the hands of a higher power. of Home Builders/Wells Fargo Representing our opinion of market demand for timber products in the Northeastern U.S. Housing Market Index. Forest Products Markets — CNBC CURRENT OUTLOOK Sawlogs Wintertime is as important a season  ReEnergy shuts down Fort Spruce & Fir UP for sawmills and pulp mills as it is for Fairfield biomass plant Pine Logs STEADY (Nov. 18th) landowners and loggers. Mills rely on the Hardwood Logs STEADY ReEnergy Holdings has closed same infrastructure to get the timber they Pulpwood its biomass-fueled electricity need to keep running. Knowing they have plant in Fort Fairfield. The Hardwood UP to buy 6 months worth of wood in a 3 month 37-megawatt facility, which Spruce & Fir UP opened in 1987 and employs timespan, mills have large plans during Pine & Hemlock UP 21 people, stopped operations winter and try to buy as much wood as they on Nov. 11. The plant runs on chipped tree branches and other STEADY can while the cold weather continues. Biomass low-value forest residue from timber harvesting operations. Mills generally have two options when Over recent years, ReEnergy's five biomass plants in the state sourcing wood to their facilities - they can Pulpwood Products have struggled financially amid either buy wood direct to their mill, or they declining rates for electricity. — Maine Biz can buy wood into a satellite wood yard It’s not unusual for the regional pulp mills on a good road system. The first option to have low raw material inventory coming is often the preferable one for a mill; it into the winter operating season. However, is less expensive to do, and it is more it is unusual to have had the great logging

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 2 of 6 conditions that we have, and still be low producing softwood sawlogs, and therefore on inventory. Part of the story is overall the volume doesn’t carry the same weight as LANDOWNER consumption at the mills, which has not hardwood pulp. However, the new life in the slowed and remains quite elevated. But softwood market does provide our foresters another reason is rooted in labor issues and with some silvicultural tools and harvest 4th Quarter 2018 the limitations of a logging force that has opportunities that have not been available  Tax lien on former Millinocket mill downsized from its peak. Although demand for years. torpedoes plan for $30 million is high and mills are going through material factory (Dec. 18th) quickly, wood suppliers are having a hard Sawn Products An old federal tax lien against time keeping up. For the moment, there are the former Great Northern no restrictions on deliveries at any of our Softwood Sawstock Paper Co. mill site will keep regional pulp facilities. LignaTerra Global from launching a $30 million factory there to Extreme volatility in lumber prices have led produce a composite wood The large regional producers of hardwood to agonizing times for dimension saw mills. product that can replace steel in high-rise building construction. kraft pulp continue to find ways to increase The regional producers of lumber are high- LignaTerra's principals have not the percentage of softwood species in their volume producers and as such they need ruled out building a plant on the mix because of both price and availability. to carry a high amount of inventory in their Millinocket site when the lien is resolved. In years past that appetite mostly consisted yards. When lumber prices move up and — Bangor Daily News of spruce and fir. However, technical down, mills with outsized finished goods advances have allowed the introduction of inventory can be quickly bitten.  Timber Innovation Act to be other lower priced coniferous species into signed into law, incentivizes the blend. This has created fresh demand Also affecting sawmills is the disconnection timber construction (Dec. 13th) for hemlock and pine pulpwood as well. between the lumber pricing, which moves The bipartisan Farm Bill daily, and log prices, which are set through promotes new and innovative New owners of the pulp mill in Old Town, contracts seasonally. For that reason log uses for wood as part of the ME have announced a restart of that facility prices can lag lumber prices by several Timber Innovation Act - which accelerates the research and with the intention of purchasing softwood. months. Moreover, sawlog prices tend development of wood for use in This will be the only mill operating on the to be more influenced by regional effects construction projects, like cross- laminated timber. Cross-laminated venerable Penobscot River corridor, which while lumber tends to move with national timber is driving the effort to was once home to nearly all of Maine’s and global trends. Unless sawmills are able replace concrete with wood in construction. These buildings pulping capacity. To temper expectations, to adjust their log supplier pricing when are faster to construct, more one must remember that softwood pulp their finished goods prices fall, they quickly energy efficient, and comprised is generally considered a byproduct of can get stuck with high-cost logs sitting in completely from renewable materials. — Woodworking Industry PRICE TRENDS IN SOFTWOOD LUMBER 2 YEAR TREND OF WEEKLY AVERAGES $900  Wood makes a comeback as mass Spruce/Pine/Fir 2x4 - Northeast timber projects thrive $760 th $800 Eastern White Pine 1x6 - Standard (Dec. 18 ) Despite a few setbacks, tall wood $700 building construction is thriving in the United States and beyond. As of June 2018, more than 400 $600 mass timber projects have been completed or are in the design stage. Mass timber is defined by $500 products that are engineered and $397 consist of smaller pieces and are

Prevailing Market PrevailingMarket Price ($/mbf) $400 assembled into larger pieces. — Construction Equipment Guide Source: Random Lengths $300

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 3 of 6 their wood yard, and low-value sawn RECENT PRICES IN HARDWOOD LUMBER - NORTHEAST HARD MAPLE, YELLOW BIRCH, R. OAK products waiting to be sold. Needless $1,500 Red Oak (4/4 - #1 Com) to say, margins can quickly erode. Hard Maple (4/4 - #1 Com) $1,400 Yellow Birch (4/4 - #1 Com) $1,360

Although sawmills can dial down their LANDOWNER production relatively quickly, workforce $1,300 limitations can make this impractical $1,200 and a double-edged sword when it

$1,080 4th Quarter 2018 is time to ramp back up. Therefore $1,100 several dimensional sawmills have kept Price($/mbf) Index

$1,000 up their pace of buying despite the $1,025 slump, working toward operating more Source: Hardwood Review efficiently and reducing variable costs. $900 Year over year, the holiday season has never represented a high water mark for lumber pricing, and so some of the low lumber pricing is seasonal. That a more mature stage. Earlier in the Biomass doesn’t mean we are anticipating an year China announced retaliatory immediate rebound, but historically tariffs on the import of U.S. hardwood It is getting increasingly difficult to recoveries have generally occurred lumber and logs, and there was an locate contractors willing and able to once the spring construction season immediate response by in both the process and deliver biomass. At this begins. price and demand of the two most point we continue to sell only limited desirable export species of red oak and volumes from very specific regions. Demand for pine logs remains high ash. Regionally in the northeast, it is and steady, despite a slight decline in The fuel source for heating systems at high quality red oak that has taken the the associated lumber price indexes we pulp mills, which had long been the brunt of the impact - demand for other track. We’ve even seen a few marginal bread-and-butter for biomass coming species seems to have been insulated. price increases for logs as sawmills from the woods, has been almost work to build their winter inventories. entirely substituted for natural gas Despite the tariffs, and despite what based systems. A few biomass plants we are seeing in lumber indexes, The market for cedar shows the tale producing electricity are struggling there seems to be a good amount of of two different end-uses. Demand for but surviving. And there is still some optimism at our regional hardwood logs for making cedar shingles, perhaps life in the pellet industry and we have sawmills. Unlike their softwood lumber 65-70% of the cedar volume we sell, cousins, hardwood sawmills can and some biomass that finds its way into is tepid due to lackluster demand for often do adjust to market fluctuations that market. There are only marginal shingles and the slow construction by sawing other species. While oak opportunities to sell biomass into each market. Demand for cedar sawlogs, of these locations. made for fencing, log cabins, structural and ash have been big export species, timbers, etc. has been reasonably sawmills are working hard on sawing other species not as dramatically Benjamin D. Carlisle steady. Winter is the time of year when PRESIDENT landowners cut 80-90% of their cedar affected by international trade issues. volume, and while we don’t know what Hard maple, soft maple, and yellow the weather will hold yet, the slow birch are more immune to these shingle market will likely not support a matters because much of the volume large cedar harvest this winter. is consumed domestically. Demand for hard maple sawlogs is strong, with some Hardwood Logs modest price increases over the quarter, and demand for soft maple and yellow The tariff situation related to birch are steady. Inventories at the mills hardwood logs appears to be reaching seem to be seasonally appropriate.

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 4 of 6 40 Years: A Look Back by Sam Radcliffe, Vice President

After more than 40 years in the forestry FIGURE 1 National Forest Timber Cut, 1980-2017 consulting and land management 14 business, on December 31 I will retire LANDOWNER from Prentiss & Carlisle. I’ve been 12 reflecting on all that changed in the forestry world during my career (and 10 4th Quarter 2018 wondering how it went by so quickly!) 8 When I finished graduate school 6 in 1977, my chosen field of forest economics was firmly focused on the Billion Feet Board 4 national forests. How was the new

National Forest Management Act 2

(1976) going to be implemented, and Source: Headwaters Economics https://headwaterseconomics.org/dataviz/national-forests-timber-cut-sold/ how would it affect timber markets? 0 Although “getting out the cut” became 1980 1985 1990 1995 2000 2005 2010 2015 more challenging due to persistent litigation brought by environmental national forest system harvest down growing timberland investment sector. groups, the harvest level on the national precipitously (Figure 1). Timberland Investment Management forests continued to rise into the mid- Organizations (TIMO’s) were created 1980’s. In the late 1980’s, national The log shortage that resulted from to raise and deploy funds for forest harvesting was increasingly subject to legal challenges and started the dramatic reduction in national institutional investment in timberland. to sputter, but the death knell was forest harvests led to a shift in lumber The Employee Retirement Income the listing of the northern spotted owl manufacturing capacity from the Security Act (ERISA) of 1974 had under the Endangered Species Act in West to the South and raised prices encouraged pension funds to diversify 1990. Because the national forests are for timber from private lands in both their portfolios away from fixed so heavily concentrated in the West, the regions (Figure 2). income investments, which resulted in NSO listing and subsequent protections investment in specialized asset classes in the early 1990’s brought the entire Rising prices greatly benefitted the such as timberland being developed in the early 1980’s. At the same time, unfavorable tax status, accounting FIGURE 2 standards, and Wall Street pressure Pine Sawtimber Stumpage Prices in North Carolina, 1976-2017 $300 for higher returns motivated forest products corporations to liquidate their $250 timberlands, and in the new TIMO sector they found willing buyers. $200 In the early years the investment $150 timberland market was not particularly $ Per MBF $ Per efficient, and the sell-side (forest $100 products corporations) did not really appreciate the valuation perspective of $50 the buy side. Consequently properties

Source: NC State Extension were sold at relatively low prices which https://content.ces.ncsu.edu/historic-north-carolina-timber-stumpage-prices-1976-2014 $0 when combined with rising timber

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 prices created out-sized investment

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 5 of 6 With low investment returns, stagnant FIGURE 3 Rolling Four-Quarter Total Return in the NCREIF All Properties Index timber prices and competitive buyers 55% 50% and sellers, the timberland market in 45% recent years has been grinding almost 40% to a halt. In both Maine and Wisconsin, LANDOWNER 35% 30% there was not a single investment grade 25% property transaction in 2018. This is a 20% somewhat unsatisfying point at which 4th Quarter 2018 15% to end a career, because it feels like the 10%

Rolling Four-Quarter Four-Quarter Rolling Return 5% industry is without direction, or at least 0% the path forward is not obvious. The -5% Source: National Council of Real Estate Investment Fiduciaries past 40 years has seen portions of the -10% industry destroyed and a new industry 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 created almost solely by a perfect returns from the mid-1980’s to late The TIMO industry is more invested in storm of unrelated public policies. 1990’s (Figure 3). the U.S. South than in any other region. Considering the erratic behavior and Following the Great Recession, it was polarized atmosphere that characterizes The great transfer of corporate lands expected that southern pine sawtimber to TIMO’s was nearly complete by prices would recover as housing picked Washington these days, one wonders 2006, the year in which International back up. Even though housing starts what unintended consequences may Papers sold its 6+ million acres of have come a long way back, pine befall our industry some day in the future. U.S. timberland. In the late years of stumpage prices remain stubbornly low. the “timberland rush”, rich prices were The initial explanations were that the Nevertheless, I have no regrets about my being paid in a market where the sellers lack of harvest during and following the career choices. Helping clients navigate now better understood how to market recession caused a build-up of inventory through this period was a challenge their properties, and buyers recognized that would take several years to bring but a pleasure, as both clients and that the supply of investment scale down. It is now recognized that the colleagues became friends. It would properties was limited. Lower and glut of inventory was created primarily be hard to overstate how many good generally declining investment returns by the Conservation Reserve Program, since then are partially attributable a federal subsidy that paid farmers to people there are in forestry as compared to the high property prices paid and plant idle land to trees beginning in to most other professions. My thanks to partially attributable to the continued 1986. By some estimates, this “inventory all of you. decline in timber prices since housing overhang” will keep prices in the U.S. peaked in 2005-06. South depressed for the next 25 years[1].

[1] “Thousands of Southerners Planted Trees for Retirement. It Didn’t Work.” Ryan Dezember, The Wall Street Journal, October 9, 2018. https://www.wsj.com/articles/thousands-of-southerners-planted-trees-for-retirement-it-didnt-work-1539095250

Ç2019 by Prentiss & Carlisle. Reproduction of this report by any means in whole or in part without express permission of the authors is a violation of federal law.

Please note: This report is intended to be an unbiased and accurate source of information on timber markets and timberland investments. However, timber market conditions and the forest products industry vary greatly within and across regions and depend on a substantial number of factors that this publication does not cover. Therefore, anyone using information published in this report for any specific purpose, sale or contract does so at his or her own risk. Information included in this report and provided by other sources is believed to be reliable and accurate. Prentiss & Carlisle assumes no responsibility for errors or omissions.

(207) 942-8295 | 107 Court Street, PO Box 637, Bangor, Maine 04402-0637 | www.prentissandcarlisle.com Page 6 of 6